Macroeconomics Exam 3

Which of the following is not a reason why the stimulus package that the government implemented during the Great Recession of 2007-2009 did not have as strong of an impact of GDP and unemployment as expected? Households had very high debt levels consumers raised their saving rates the stimulus package caused prices to fall in many sectors the effects of the stimulus package were diffuse and spread thinly among many sectors

the stimulus package caused prices to fall in many sectors

Assume the consumption schedule for a private closed economy is C= 40+0.75Y, where C is consumption and Y is gross domestic product. The multiplier for this economy is: 3 4 5 10

4

Graphically, how do you show demand-pull inflation?

Aggregate demand shifts to the right

Which of the following represents the most expansionary fiscal policy? a $10 billion tax cut a $10 billion increase in government spending a $10 billion tax increase a $10 billion decrease in government spending

a $10 billion increase in government spending

Which of the following represents the most contractionary fiscal policy? a $30 billion tax cut a $30 billion increase in government spending a $30 billion tax increase a $30 billion decrease in government spending

a $30 billion decrease in government spending

Which of the following will not cause the consumption schedule to shift? a sharp increase in the amount of wealth held by households a change in consumer incomes the expectation of a recession a growing expectation that consumer durables will be increasing in price soon

a change in consumer incomes

An appropriate fiscal policy for severe demand-pull inflation is: an increase in government spending depreciation of the dollar a reduction in interest rates a tax rate increase

a tax rate increase

An increase in net exports will shift the: aggregate expenditures curve upward and the aggregate demand curve rightward aggregate expenditures curve upward and the aggregate demand curve leftward aggregate expenditures curve downward and the aggregate demand curve rightward aggregate expenditures curve downward and the aggregate demand curve leftward

aggregate expenditures curve upward and the aggregate demand curve rightward

When planned investment exceeds saving in a private closed economy: aggregate expenditures will equal GDP aggregate expenditures will exceed GDP aggregate expenditures will be less than GDP consumption plus investment will equal GDP

aggregate expenditures will exceed GDP

The MPC can be defined as the: change in consumption divided by the change in income change in income divided by the change in consumption ratio of income to saving ratio of saving to consumption

change in consumption divided by the change in income

When you save money, you give up ______

current consumption of money

What is national debt?

debt from all years added up

The foreign purchases effect suggests that an increase in the US price level relative to other countries will: increase the amount of US real output purchases increase US imports and decrease US exports increase both US imports and US exports decrease both US imports and US exports

increase US imports and decrease US exports

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to: affect neither aggregate supply nor aggregate demand increase aggregate demand reduce aggregate demand reduce aggregate supply

increase aggregate demand

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: increase government expenditures by $100 billion increase government expenditures by $50 billion reduce taxes by $50 billion reduce taxes by $200 billion

increase government expenditures by $50 billion

A decrease in interest rates caused by a change in the price level would cause a: decrease (or shift left) in aggregate demand increase (or shift right) in aggregate demand decrease in the quantity of real output demanded (or movement up along AD) increase in the quantity of real output demanded (or movement down along AD)

increase in the quantity of real output demanded (or movement down along AD)

Other things equal, an increase in an economy's exports will: lower the marginal propensity to import have no effect on domestic GDP because imports will change by an offsetting amount decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP increase its domestic aggregate expenditures and therefore increase its equilibrium GDP

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP

In the aggregate expenditures model, an increase in government spending may: decrease real GDP increase output and employment shift the aggregate expenditures schedule downward reduce the size of the inflationary gap

increase output and employment

A newspaper story states, "For the fourth straight quarter, the nation purchased more goods from abroad than ever before." The event described would: increase the equilibrium level of GDP decrease the equilibrium level of GDP make no change in the equilibrium level of GDP increase, decrease, or make no change in the equilibrium level of GDP, we cannot tell from the information given

increase, decrease, or make no change in the equilibrium level of GDP, we cannot tell from the information given

When deriving the aggregate demand (AD) curve from the aggregate expenditures model, an increase in US product prices would cause an increase in: the value of household wealth and lower consumption expenditures interest rates and lower investment expenditures exports and imports US resource prices and an increase in aggregate supply

interest rates and lower investment expenditures

The economy experiences an increase in the price level and an increase in real domestic output. Which is a likely explanation? interest rates have increased business taxes have increased wage rates have fallen net exports have increased

net exports have increased

Suppose that a mixed open economy is produced at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's budget shows a surplus, planned investment must exceed saving a recessionary expenditure gap must exist saving most exceed planned investment

planned investment must exceed saving

which of the following factors does not help explain the instability of investment? business expectations can quickly change for unpredictable reasons innovations in the economy occur quite irregularly profits of firms are highly variable from one period to the next purchases of capital goods are usually nondiscretionary and cannot be postponed

purchases of capital goods are usually nondiscretionary and cannot be postponed

The labels for the axes of an aggregate supply curve should be: real domestic output for the vertical axis and price level for the horizontal axis real domestic output for the horizontal axis and price level for the vertical axis real employment for the vertical axis and price level for the horizontal axis aggregate demand for the vertical axis and real national output for the horizontal axis

real domestic output for the horizontal axis and price level for the vertical axis

what business cycle goes with expansionary fiscal policy?

recession business cycle

What is one major drawback with fiscal policy?

run by politicians, always wanting expansionary, not contractionary

At the point where the consumption schedule intersects the 45-degree line, the MPC equals 1 the APC is zero saving equals income saving is zero

saving is zero

Other things equal, a 10 percent decrease in corporate income taxes will: decrease the market price of real capital goods have no effect on the location of the investment demand curve shift the investment demand curve to the right shift the investment demand curve to the left

shift the investment demand curve to the right

Graphically, how do you show cost-push inflation?

short-run aggregate supply shifts to the left

Generally speaking, the greater the MPS, the smaller would be the increase in income which results from an increase in consumption spending larger would be the increase in income which results from an increase in consumption spending larger would be the increase in income which results from a decrease in consumption spending smaller would be the increase in income which results from a decrease in consumption spending

smaller would be the increase in income which results from an increase in consumption spending

What is dissavings?

spend more money than you make

If personal taxes decrease what happens to your level of consumption and savings?

taxes go down, consumption and savings go up

If personal taxes increase what happens to your level of consumption and savings?

taxes go up, consumption and savings goes down

What are some ways that aggregate supply in the short run will shift left or right?

technology, input prices, labor supply, and government regulation

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that: the money supply has declined the price level is inflexible downward and a recession has occurred cost-push inflation has occurred productivity has declined

the price level is inflexible downward and a recession has occurred

What is a budget deficit and how does it happen?

year after year debt that we have from spending more than we get in taxes

If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by: $1 billion $0.9 billion $10 billion $9 billion

$9 billion

An increase in spending of $25 billion increases real GDP from $600 billion to $700 billion. The marginal propensity to consume must be: 0.25 and the multiplier is 4 0.50 and the multiplier is 2 0.75 and the multiplier is 4 0.80 and the multiplier is 5

0.75 and the multiplier is 4

Which of the following it is a correct statement of the effects of a lump sum tax? Disposable income will increase by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC Disposable income will decline by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the multiplier Disposable income will decline by the amount of the tax, and consumption at each level of GDP will also decline by the amount of tax Disposable income will decline by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC

Disposable income will decline by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC

Equation for money multiplier:

MM= 1/1 - MPC

What is the interest-rate effect?

as interest rates increase, less loans are taken out and Ig of GDP goes down

What is the foreign purchases effect?

as prices increase or exchange rates increase, imports and exports are affected

What is the real-balance effect?

as prices increase, purchasing power is lower so C of GDP goes down

The long-run aggregate supply analysis assumes that: input prices are fixed, while product prices are variable input prices are variable, while product prices are fixed both input and product prices are variable both input and product prices are fixed

both input and product prices are variable

Unintended changes in inventories: cause the economy to move away from the equilibrium GDP are treated as components of consumption bring actual investment and saving into equality only at the equilibrium level of GDP bring actual investment and saving into equality at all levels of GDP

bring actual investment and saving into equality at all levels of GDP

Discretionary fiscal policy will likely cause budget: surpluses during recessions and deficits during periods of demand-pull inflation deficits during recessions and surpluses during periods of demand-pull inflation surpluses during both recessions and periods of demand-pull inflation deficits during both recessions and periods of demand-pull inflation

deficits during recessions and surpluses during periods of demand-pull inflation

what business cycle goes with contractionary fiscal policy?

expansion business cycle

Injections into the income-expenditure stream include: transfer payments and imports government purchases and exports taxes and imports taxes and transfer payments

government purchases and exports

The effect of contractionary fiscal policy is shown as a: rightward shift in the economy's aggregate demand curve rightward shift in the economy's aggregate supply curve movement along an existing aggregate demand curve leftward shift in the economy's aggregate demand curve

leftward shift in the economy's aggregate demand curve

Why are prices downward inflexible?

price wars, menu costs, wage contracts

In the late 1900s, the US stock market boomed, causing US consumption to rise. Economists refer to this outcome as the: Keynes effect interest-rate effect wealth effect multiplier effect

wealth effect

Other things constant, if domestic consumers purchase fewer foreign goods at each level of GDP in the short run, GDP will rise GDP will fall foreign countries' GDP will rise there will be no change in GDP in this country

GDP will rise

The so-called Paradox of Thrift that became quite obvious in the Great Recession of 2007-2009 does not refer to which of the following? Saving may be virtuous for the individual, but it could be bad for the economy as a whole Consumers becoming thriftier may help long-term growth but, ironically, reduces current output In trying to spend, less now, consumers will end up spending more later on As individuals try to save more, the whole group may end up saving less as total income declines

In trying to spend less now, consumers will end up spending more later on